Treasurys end higher, jobs data awaited

Benchmark yield hits lowest level in seven weeks

By

WanfengZhou

NEW YORK (MarketWatch) -- Treasury prices edged higher Wednesday, pushing the 10-year yield to its lowest level in seven weeks, with investors cautiously awaiting U.S. non-farm payrolls data later in the week for clues to the U.S. interest-rate outlook.

The bond market in recent sessions has struggled with the question of whether or not the Federal Reserve will raise interest rates again in August after seventeen rate hikes in a row.

"No doubt the Fed has a tough balancing act ahead," said David Rosenberg, North American economist at Merrill Lynch. "Just as economy has begun to lose momentum in a very serious way, the core inflation rates have begun to accelerate."

The 10-year benchmark Treasury note closed 4/32 higher at 101 08/32 with a yield
TNX, +0.63%
of 4.962%, down from 4.981% late Tuesday.

The benchmark yield, used in setting corporate and mortgage borrowing rates, had earlier dropped to 4.957%, the lowest level since June 13.

Bond prices and yields move in opposite directions.

Investors will likely stay sidelined ahead of Friday's nonfarm payrolls and average hourly earnings data, which are expected to provide more insight into what the Fed will do at its policy meeting Aug. 8, said Kim Rupert, managing director of global fixed income analysis at research firm Action Economics.

The consensus of Wall Street economists sees nonfarm payroll growth of about 143,000 for last month, according to a survey conducted by MarketWatch. The Labor Department's report will be released at 8:30 a.m. Eastern time. See Economic Calendar.

The jobs number is "critical" as the market "has embraced to some extent the Fed pause scenario," said John Rocket Spinello, chief technical analyst at Jefferies & Co.

Treasurys stayed little changed Tuesday even after a set of inflation data modestly reduced the likelihood of a rate pause by the Federal Reserve in August.

The bond market has maintained its positive trend "as signs that the U.S. economy is slowing continue to dominate market sentiment," said Charmaine Buskas, an economist at Moody's Economy.com.

The 2-year Treasury note ended unchanged at 100 3/32 with a yield of 4.954%.

ADP: 99,000 private jobs added July

Earlier, the bond market showed a limited reaction to a monthly Automatic Data Processing national employment report that showed U.S. nonfarm private-sector payrolls grew by 99,000 in July. See full story.

"These findings indicate a deceleration of employment," said Joel Prakken, chairman of Macroeconomic Advisers LLC, which produces the employment report for ADP, the payroll-processing giant.

Adding in the 15,000 government jobs created in a typical month, the ADP report would indicate growth in nonfarm payrolls of about 114,000 in July.

The ADP report is considered by some to be the best single predictor of the government's nonfarm payroll report.

However, the ADP report got it stupendously wrong in June, when it forecast private-sector gains of 368,000, while the government report showed just 90,000 new jobs created in the private sector and an additional 31,000 government jobs.

At the same time, escalating Middle East tensions continued to generate safe-haven demand for bonds, analysts said.

Israeli Prime Minister Ehud Olmert said there will no ceasefire in Lebanon until an international force of peacekeepers has been deployed in southern Lebanon, according to media reports.

"Lingering geopolitical concerns remain a wildcard," said David Ader, government bond strategist at RBS Greenwich Capital.

Auction announcement

Elsewhere, the Treasury Department plans to offer $44 billion in securities next week to refund federal debt and raise $21.6 billion in new cash, the Treasury said Wednesday.

The U.S. government will auction $21 billion in 3-year notes on Monday, and $13 billion in 10-year notes on Wednesday. The government will also auction $10 billion in 30-year bonds on Thursday.

Separately, Treasury said it will issue 30-year bonds on a quarterly basis beginning in February 2007. All auctions will settle on Aug. 15, Treasury said.

The Treasury refunding announcement "gave the long end an excuse to take some profits," driving yields sharply higher, said Jefferies' Spinello.

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